The mid-term elections are upon us and the question keeps coming up: how will this affect the stock market? Granted, it comes up less during the mid-terms than the Presidential elections (see that answer here^^), but it’s still very much in the investing community’s consciousness. Let’s look at some data.
Currently, we have a Republican president and a Republican-held Congress (both the Senate and the House of Representatives). This gives us what is called a United Government, as one party controls both the executive branch and the legislative branch. In theory, a united government makes it easier for the controlling party to pass its agenda, whereas a divided government may experience significant gridlock.
Since 1945 (through 2016), the stock market, as measured by the S&P 500, has an average compound annual growth rate (CAGR) of 9.7% under Democratic presidents. Under Republican presidents, the CAGR has been 6.7%*. Interestingly, when considering Congress, a Democratic controlled legislature (both the House and the Senate) saw an S&P 500 CAGR of 7.4%. Conversely, when controlled by the Republicans, the CAGR was 13.4%*. Hmmmmm…. Seems a little inconclusive.
Here’s a little bit more. Since 1979, according to Goldman Sachs, when there was a divided government, the S&P 500 saw annualized gains of 10.8%. Compare that to 16.4% annualized return during periods of a united government^. These returns are for all divided and united Governments, that is, they did not distinguish between Republican controlled or Democratic controlled.
Finally, what has happened during the mid-term elections? Since 1946, in the 18 midterms through 2014, the S&P 500 has had an average price return of 16.7% in the 12 months following the election.** This is above the average annual return for the market.
It’s important to note that we are at a mid-term election where there is a good chance that the Democrats will re-take the House. This would move us from a united government to a divided one. A little bit of a “push me, pull you” for the market, according to history. And I guess that’s the point. Just looking at the make-up of our Government cannot predict how the market will do.
So, why write about all this if it doesn’t really matter? It’s really about trying to dispel the myth that presidents or Congress can affect the economy and the stock market as much as they think. While they are important cogs in the machine, there are many more factors that influence this equation. Important issues such as the business cycle, interest rates, inflation, and corporate earnings (among many others) all contribute to determine market levels.
It also might give you some nerdy stock market material for all those upcoming holiday parties.
Check the background of this investment professional on FINRA’s BrokerCheck.
An Investment Advisor registered through CUSO Financial Services, L.P., Gavin has 22 years of experience as an advisor in the Puget Sound area.
“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship I can really get a sense of what’s going to work best for them.”
Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.
So what is Gavin’s vision for his dream retirement?
“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”
When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football, and taking weekend trips around the Northwest.
Gavin is registered to transact securities business in the states of WA, OR, CA, AZ, FL, HI, ID, IL, MN, NM, NY and VA.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
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